Contents of a contract - Interpretation of contract terms (conditions, warranties, and innominate terms)

Learning Outcomes

This article explains the classification of contract terms into conditions, warranties, and innominate terms. It outlines how courts interpret these terms and the consequences of breaching each type. For the SQE1 assessments, you need to distinguish between these categories, understand the remedies available for breach, and apply the relevant legal principles, particularly the test for innominate terms established in Hong Kong Fir Shipping. This knowledge will enable you to analyse contractual disputes and identify appropriate legal outcomes in SQE1-style single best answer questions.

SQE1 Syllabus

For SQE1, you are required to demonstrate knowledge of how contractual terms are classified and the implications of that classification. You will likely need to identify whether a term is a condition, warranty, or innominate term based on the facts provided, and determine the remedies available to the innocent party upon breach.

As you work through this article, remember to pay particular attention in your revision to:

  • the distinction between conditions, warranties, and innominate terms
  • the remedies associated with breaching each type of term (termination and/or damages)
  • the test applied to determine the effect of breaching an innominate term (Hong Kong Fir Shipping)
  • how courts determine the classification of a term (express wording, statute, judicial precedent, intention).

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. A term that goes to the very root of the contract is likely to be classified as which of the following?
    1. A warranty
    2. An innominate term
    3. A condition
    4. A representation
  2. If a party breaches a warranty, what remedy is the innocent party generally entitled to?
    1. Terminate the contract and claim damages
    2. Terminate the contract only
    3. Claim damages only
    4. Set aside the contract
  3. Which case established the test for determining the consequences of breaching an innominate term?
    1. Poussard v Spiers and Pond
    2. Bettini v Gye
    3. Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd
    4. Hadley v Baxendale

Introduction

When a contract is formed, it contains various terms outlining the parties' obligations. Understanding the nature and importance of these terms is fundamental because it determines the consequences if a term is broken (breached). Contract law traditionally categorises terms into conditions and warranties. A third category, innominate terms, has also developed. For SQE1, you must be able to differentiate between these types of terms and understand the remedies available for their breach.

CLASSIFYING CONTRACT TERMS

The classification of a term dictates the remedies available to the innocent party if that term is breached. Courts look at the intention of the parties at the time the contract was made, the contract's wording, relevant statutes, and the consequences of the breach itself.

Conditions

A condition is an essential term of the contract, considered so important that it goes to the root of the agreement. Its performance is fundamental to the contract's main purpose.

Key Term: Condition
A major term of the contract which goes to its root. Breach of a condition entitles the innocent party to terminate the contract and claim damages.

If a condition is breached, the innocent party has the right to choose whether to terminate the contract (treat it as ended) and claim damages for any loss suffered, or to affirm the contract (treat it as continuing) and claim damages. The breach of a condition is often referred to as a repudiatory breach.

Key Term: Repudiatory Breach
A breach of contract that is sufficiently serious to entitle the innocent party to treat the contract as terminated. Typically, this involves breaching a condition or breaching an innominate term in a serious way.

Classic examples illustrating conditions often involve time stipulations described as being 'of the essence' or fundamental obligations like the requirement for an opera singer to perform on the opening night (Poussard v Spiers and Pond (1876) 1 QBD 410).

Warranties

A warranty is a less important term of the contract, collateral or subsidiary to the main purpose of the agreement.

Key Term: Warranty
A minor or subsidiary term of the contract. Breach of a warranty only entitles the innocent party to claim damages; they cannot terminate the contract.

Breaching a warranty does not give the innocent party the right to terminate the contract. Their only remedy is to claim damages for the loss caused by the breach. The contract itself remains in force, and both parties must continue to perform their remaining obligations. An example is a singer missing rehearsals but being available for the main performances (Bettini v Gye (1876) 1 QBD 183).

Worked Example 1.1

FabricCo contracts with DressMaker Ltd to supply 100 metres of silk fabric by 1st March, stating that 'time is of the essence'. FabricCo delivers the fabric on 8th March. What options are available to DressMaker Ltd?

Answer: The phrase 'time is of the essence' generally makes the delivery date a condition. FabricCo's late delivery is a breach of condition (a repudiatory breach). DressMaker Ltd can choose to terminate the contract (reject the fabric and claim damages for any loss, e.g., lost profits on dresses) or affirm the contract (accept the fabric but still claim damages for losses caused by the delay).

Revision Tip

Be cautious about labels. While parties might label a term a 'condition', the court may decide based on the contract overall that it is actually a warranty or innominate term if classifying it as a condition would lead to an unreasonable result. However, for SQE1 purposes, explicit wording like 'time is of the essence' usually indicates a condition.

Innominate Terms

Not all terms fit neatly into the categories of condition or warranty. An innominate term (or intermediate term) is one where the remedy for breach depends on the seriousness and consequences of that breach.

Key Term: Innominate Term
A term of the contract whose classification as a condition or warranty is not determined until the effects of its breach are considered.

The key case is Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26. This case established the test: does the breach deprive the innocent party of substantially the whole benefit which it was intended they should obtain from the contract?

  • If YES (the breach is serious): The innocent party can terminate the contract and claim damages (treating it like a breach of condition).
  • If NO (the breach is minor): The innocent party can only claim damages (treating it like a breach of warranty).

Worked Example 1.2

CharterCo hires a ship from ShipOwner Ltd for 24 months. A term requires the ship to be 'seaworthy'. The ship requires 5 weeks of repairs at the start and is unavailable for a further 15 weeks later due to engine trouble and incompetent crew. CharterCo wants to terminate the contract after the first 5 weeks. ShipOwner Ltd argues seaworthiness is only a warranty. Advise CharterCo.

Answer: The term 'seaworthy' is likely an innominate term. Its breach could range from minor (e.g., a missing lifebuoy) to major (e.g., serious engine failure). Applying the Hong Kong Fir test: Does the initial 5-week delay, in the context of a 24-month charter, deprive CharterCo of substantially the whole benefit of the contract? Arguably not at that point. However, the cumulative effect of the 20 weeks unavailability likely does satisfy the test. CharterCo could likely terminate after the further 15 weeks, but potentially not after only the initial 5 weeks (at which point damages would be the remedy). The remedy depends on the effect of the breach.

Statutory Classification

Some statutes classify certain terms automatically. For example, the Sale of Goods Act 1979 implies terms regarding title, description, quality, and fitness for purpose into contracts for the sale of goods. Some of these are classified by the Act as conditions (e.g., s 12 - title) and others may be conditions or warranties depending on the context (e.g., ss 13, 14).

Exam Warning

For SQE1, focus on the core distinctions and the Hong Kong Fir test. Remember that the consequence of breach determines the remedy for innominate terms. Don't assume a term is a condition or warranty without considering its importance, the contract's wording, and potentially the effect of the breach if it appears to be an innominate term.

Key Point Checklist

This article has covered the following key knowledge points:

  • Contract terms can be classified as conditions, warranties, or innominate terms.
  • A condition is a fundamental term; breach allows termination and damages.
  • A warranty is a minor term; breach allows damages only.
  • An innominate term's classification depends on the severity of the breach's consequences.
  • The test for innominate terms asks if the breach deprives the innocent party of substantially the whole benefit of the contract (Hong Kong Fir Shipping).
  • Serious breach of an innominate term allows termination and damages; minor breach allows damages only.
  • Classification can be determined by express wording, statute, precedent, or inferred intention, but the effect of breach is key for innominate terms.

Key Terms and Concepts

  • Condition
  • Repudiatory Breach
  • Warranty
  • Innominate Term
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